The most devastating sin in Chicago was arrogance — mayors and aldermen sure they could see the city's economic future and, paradoxically, doubting that it ever could implode. They embodied the diabolical, delusional fallacy that more jobs for ever more young people would generate perpetually more tax revenue to more generously reward more public workers. Bull markets of the 1980s and '90s intensified the arrogance. What could go wrong?

Business guru Warren Buffett had answered that question in a prescient 1975 letter to Katharine Graham, head of The Washington Post Co., on whose board he served: "There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs. Actuarial thinking simply is not intuitive to most minds. The lexicon is arcane, the numbers seem unreal, and making promises never quite triggers the visceral response evoked by writing a check."

Pension math is relentless, tyrannical: Chicago pols and union officials knew they were committing tomorrow's taxpayers to pension costs that could grow astronomically over time. But since their pension hikes likely couldn't crush City Hall (or taxpayers) for a few decades, they were protected by the needn't-be-spoken blood oath of IBD, YBD: If pension costs explode, so what? I'll be dead, you'll be dead.

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Throughout Chicago's financial decline, city officials have layered on more and more debt with no more solid plan for repayment than a vague hope that a resurgent economy will keep City Hall out of bankruptcy. When the city has occasionally faced credit downgrades and other reckonings, the collective response — vividly apparent during Daley's squandering of rainy-day assets and similar budget gimmicks — has been no more responsible than, What's the least we have to do to escape today's crisis?

As the money runs out, and as City Hall scrambles to circumvent a state law that demands more money for pensions, there is no way for Chicago to afford extra cops, extra teachers or the other smart extras.

The net result over time, as City Hall deepens its liabilities yet delays retiring them, has been a massive theft of wealth in dollars by the billions: government leaders robbing their children and grandchildren, the putative taxpayers of tomorrow. If, that is, those young people stay in Chicago.

The city of Chicago has long been regarded as an economic
engine of the Midwest. It is home to some of the country’s
largest industries and more than 30 of the nation’s Fortune
500 companies. Chicago is accessible by road, rail and water,
and is located in a state that boasts an abundance of natural
resources.

But decades of fiscal mismanagement by government
agencies in Chicago have put the metropolis at a crossroads.
In July 2013, the city of Chicago released a grim budget report
that showed that the city owed billions of dollars in debt and
unfunded pension and health insurance liabilities.

But the city Chicago is not the only government agency that
city residents pay taxes to – taxpayers also fund the operations
Chicago Public Schools, the Chicago Transit Authority, the
Chicago Park District and a large share of Cook County.
This is the first report that adds together all the debts and
liabilities of the major government units operating in Chicago
– a necessary step in fully understanding how much debt
Chicago taxpayers are expected to shoulder.

All told, Chicago residents are officially on the hook for $63.2
billion in government pensions, health insurance and other debt.
This staggering figure totals more than $23,000 per Chicago
resident, or more than $61,000 per household.

Even these figures grossly understate the severity of the
problem.

That’s because the official pension liabilities are underestimated.
Pension funds have long assumed unrealistically high
investment returns, which make the funds look healthier
than they actually are. Moody’s Investors Service now
calculates unfunded pension liabilities using more appropriate
discount rates.

Under new Moody’s methodology, Chicago’s unfunded pension
liabilities are at least $23 billion higher than what’s officially
reported. Today, the systems have only 31 cents for every dollar
they should have to make necessary pension payouts in the
future.

When summing up Chicago’s total debt, it’s necessary to use
the Moody’s calculation of unfunded pension liabilities instead
of those officially reported by the city. That’s because the
municipal bond market depends heavily on Moody’s ratings
when investing in Chicago bonds.

Moody’s based its recent triple-notch downgrade of the city’s
debt on the agency’s new methodology for valuing pension
shortfalls. The downgrade has led to a collapse in Chicago’s
bond prices and a significant increase in its borrowing rates.
Chicago’s credit rating is now only four notches away from
junk-bond status. Many institutional investors are not allowed
to invest in junk bonds, meaning the city will face significant
pressure in accessing the bond market going forward if this
downward trend continues.

Ignoring the Moody’s pension calculation not only understates
the severity of Chicago’s debt crisis, but also the true burden
that Chicago taxpayers may be forced to shoulder.

Chicago taxpayers face $86.9 billion in debt and unfunded
liabilities under new Moody’s methodology. That’s $32,000 per
Chicago resident and more than $84,000 for every Chicago
household.
Chicago also faces the risk that subsidies from the state
of Illinois – which is nearing insolvency – may be reduced
or eliminated. The units of government that operate within
Chicago’s borders depend on billions of dollars in state
funds. Chicago Public Schools, or CPS, receives more than
$1.8 billion in state education support, and Chicago Transit
Authority, or CTA, receives millions more.1 Any cuts in those
funds will only increase the pressure on Chicago’s finances.
Chicago’s fiscal squeeze is already threatening the city’s
ability to provide core services. CPS has laid off thousands
of staff and closed nearly 50 schools,2 while the city’s crime
rate is among the highest in the nation. When taxpayers stop
receiving the services they are paying for, they’ll leave. Chicago
has already lost nearly 200,000 people since the 2000 census
– meaning there are fewer taxpayers left to pick up the city’s
growing debt. Taxpayers should be worried. They’ll need to see
big and bold reforms to know they’re not taken for granted.
Governments in the state, county and city of Chicago can
change course. It will take bold reforms to stabilize Chicago’s
finances, protect the city’s taxpayers and restore confidence in
the city’s future.
A necessary starting point is to fix the city’s pension crises.
Chicago needs comprehensive pension reform that ends the
accrual of defined benefit liabilities, protects what workers
have already earned and empowers government workers with
401(k)-style retirement plans. It must also cap the growing
debt burden and pay down existing debts in a responsible
manner. Finally, each unit of government in Chicago must
rein in spending and open up union contracts to renegotiate
affordable levels of benefits and wages – bringing labor costs,
which are the key driver of the city’s costs, in line with what its
taxpayers can afford.

The passage last week of reforms to Illinois' public pension system could signal that the legislature may soon address Chicago's pension funding problem, Moody's Investors Service said in a report released on Friday.

But Chicago's new budget does not do enough to prepare the city for a $590 million state-mandated increase in pension payments in 2015, the credit rating agency added.
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Chicago's large and growing pension liabilities led Moody's in July to drop the city's credit rating three notches to A3 with a negative outlook from Aa3.
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Moody's said the city's budget for the fiscal year that begins Jan. 1 allocates $478 million for pensions, which is well below actuarial requirements. The budget also does not build up
resources through revenue growth or spending cuts in anticipation of the 2015 funding increase absent action by the state legislature.

"If Illinois law is amended to allow Chicago to postpone the contribution increase beyond budget year 2015, the city will have averted a near-term budget crisis," the report said.

However, if the current course of underfunding continues, actuaries have projected that the systems will begin to reach insolvency as early as 2022."

Fighting for survival, Fraternal Order of Police President Mike Shields is making an explosive allegation: that the last two police contracts dictated by an independent arbitrator were “fixed” and that the recent sergeants’ contract may also have been “rigged.”

Shields leveled the stunning charges Monday in a letter to Inspector General Joe Ferguson, demanding an investigation. A copy was delivered to FOP board members, including a handful of potential rivals whom Shields is now accusing of being in cahoots with the city.

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Earlier this year, an actuarial analysis distributed by Shields helped torpedo a sergeants’ contract that Mayor Rahm Emanuel had hoped to use as a road map to solve the city’s nearly $20 billion pension crisis.

The failed agreement would have given sergeants a 9 percent pay raise over four years in exchange for raising the retirement age for sergeants to 53; increasing employee pension contributions from 9 to 12 percent by January 2015; hiking health care contributions for new retirees to 2 percent of annuities; forfeiting cost-of-living increases every other year and limited C.O.L.A. in intervening years to 2.5 percent with simple interest.

City Hall and the sergeants union had also agreed to seek state legislation that would have given the city seven years to “ramp up” funding for police pensions, instead of coughing up another $600 million to stabilize police and fire pension funds in 2015.

The Illinois Fraternal Order of Police has suspended the president of the union representing Chicago Police officers — and prohibited Mike Shields from negotiating with the city — after accusing him of violating his oath of office and branding him a “dictator.”

Uh......

Quote:

The extraordinary step by State FOP President Ted Street was announced at a general membership meeting Tuesday night where a Monroe District beat car was called to “police the police” amid fears it could get ugly.

Street’s power play comes just two days after Shields leveled the explosive charge that the last two police contracts dictated by an independent arbitrator were “fixed” in the city’s favor and that the recent sergeants’ contract arbitration may also have been rigged.

That was the final straw, but not the only reason Street triggered a disciplinary process that will culminate in an investigation by a five-member committee and a hearing before the State FOP’s 30-member board, where Shields will have the opportunity to present a defense.

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During the Tuesday night meeting, Shields sent defiant text messages to the Chicago Sun-Times. He claimed the state FOP was doing the bidding of the former union leaders whom Shields has accused of being in cahoots with the city.

“They can’t remove me. They don’t have the authority. It’s an illegal act and frivolous,” he wrote in the Tuesday night text.

“The state president is Mark Donahue’s little lackey. Mark Donahue will try every play in the book. He should be apologizing to the members for screwing them over. I’ve done more fighting against the city than Mark Donahue has done in nine years. Unlike him, I don’t play ball with the city,” Shields wrote in another text message, referring to the immediate past FOP president.